Hotel projects mutate as loan rates rise

Realty firms shelve hospitality plans, turn to IT, commercial developments

MUMBAI: In a market situation where rising real estate prices and increasing interest rates are putting a spoke in the development wheel across various industries, its impact is slowly starting to show up in the Indian hospitality industry as well.

Realty companies developing IT, commercial, residential and hotel space, amongst others, are now revisiting their development plans to ensure maximum returns with reasonable break-even time. And as part of this exercise, they are seriously looking at shelving their hotel plans.

In fact, quite a few have already put their hotel plans on hold, reliable industry sources told DNA Money. “At least two real estate companies in Pune have decided not to go ahead with their hotel projects and build IT and commercial space instead,” said a source.

Raj Bhansali, director of one of Pune’s renowned realty companies, the Clover Group, said, “Yes, we have put our hotel project on hold. Primary reason behind this move is the substantial increase in the land/project cost since the time of its conceptualisation. We had almost reached the final stages of signing the management agreement. However, blocking the real estate for a hotel project doesn’t seem like a viable option at this stage.” The project was to be managed by one of India’s leading hospitality chains, the Oberoi Hotels & Resorts.

Another Pune-based realty company, unwilling to be identified, confirmed that it had called off two of its hotel projects. It cited rising interest rates as the primary reason, besides the capital intensive nature and long gestation period of the business.

Atul Chordia, managing director of Panchsheel, said the shifting of hotels from infrastructure to commercial projects category is proving to be a major hurdle for realty companies using debt funds for their hospitality projects.

“The interest rate for hotel development under the infrastructure category was a reasonable 8%. However, the rate of interest under the commercial development category is close to 14%, thus making hotels a not-so-attractive proposition for real estate companies,” said Chordia.

This phenomenon, according to Chordia, is very prominent amongst developers who do not have access to interest-free funds or the capital markets and who depend largely on debt funding with some equity component.

But, it is premature to classify this as a national trend, Akshay Kulkarni, national director - hospitality and leisure, Knight Frank India said. “It might have happened in a few cases because the developer gets the same floor space index (FSI) for a 100 sq ft IT space or a hotel space. However, the returns on the IT/commercial space are much higher and faster as compared to the capital deployed.”

According to Kulkarni, an IT/commercial space gets operational and starts generating cash flow within 18 months from ground breaking, while a hotel project takes a minimum of 3 years to get operational and another 5 years for breakeven.
“Besides, the market seems very bullish as of today. What is the assurance that hotels will garner the same kind of room rates and revenues three years hence when the market will be flooded with rooms? A blood bath situation will arise, leading to price wars, which a developer would not like to get into,” feels Bhansali.

India currently has around 116,000 rooms in the organised hotels category (FHRAI estimates) and going by the ministry of tourism (MoT) figures, requires close to 100,000 hotel rooms in the near future. In fact, the ministry claims to have sanctioned 300 hotel projects believed to be under various stages of development. Industry experts estimate that the majority of the new hotel developments (60%) are expected to be in the five-star and five-star deluxe categories, while the balance will in the business, budget and economy segments.